Hedge Fund May Be Next to Pay in Fund Scandal

The legal opinions, some of which were not put into writing, are said to focus on what some see as a potential loophole in the securities regulation that's supposed to prohibit late trading -- the "price forward rule." These opinions point out that the regulation never states that all orders to buy or sell mutual fund shares must be submitted to the fund company by the 4 p.m. close of the trading day.

This omission in the price forward rule may leave the door open for some late trading through a broker intermediary, as long as it takes place before a mutual fund company calculates that day's net asset value, or NAV, for the shares of a particular fund. Many mutual funds don't actually calculate the NAVs for their funds until 5:30 p.m., or 90 minutes after the 4 p.m. close.

The SEC recently proposed new rules that would eliminate the late trading loophole, as well as make it difficult for investors to engage in market-timing.

But it's unclear how much the legal advisory opinions may help hedge funds such as Veras.

Sources familiar with the investigation said Canary, the hedge fund run by Edward Stern that triggered the mutual fund investigation, also had an advisory opinion from its lawyers, which gave the green light to some late trading.

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